I've asked the question myself to many.
"How much is enough volume to analyse"?
Frankly I've never had a good answer so I've attempted to make one work for me.
The problem lies in the dilution of volume and price movements as you look
into lower time frames. The question always begs how low can I go in time frame
before volume and price action become insignificant. Just as attempting to read a chart
which on a daily basis have very little volume and price action.
Reading say CBA or Forex on a Daily bar has massive volume and price range --generally.
If we cut it back to a 1 min chart then we have diluted that information 360 times in the same day.
Lower time frames even more!
After a great deal of pondering and charting I have come up with the following.
(1) There must be clear range --low to high-- in the majority of bars on the chart.
(2) There must be enough volume to cause clear movement in a 10 period SMA of volume.
This means that each instrument under analysis will return a different time period
in which the above is satisfied. So to a great degree this becomes discretionary--BUT
there are conditions which must be met.
If I am open a chart which in a 1 min time frame doesn't satisfy the above I just double the
time frame---starting at 1 min---until it does. For Forex 1 min and lower will satisfy the above
for some stocks even Daily wont satisfy the above. If I cant get satisfaction in the time frame
I wish to trade than I wont trade it---as I cant reliably use Volume and Range analysis on the chart.
This leads to the next question
"How do I determine Extreme volume,Average volume and Very low volume."
For this I use an SMA for a very quick visual (And for search criteria).
From the chart (1) below you'll see I have.
Click to expand
(1) Low volume as 25% of Average volume over 10 periods.
(2) Average volume as the SMA of 10 periods Volume.
(3) High volume as 2 times volume over 10 periods average volume
(3) Extreme volume as 3 times--plus volume over 10 periods average volume.
I have this set in a template for metastock and it roughly equates to the background
So what are we looking for?
I look for extremely high volume 3 x plus as a starting point,and certainly during a trade!
Volume in isolation can be misleading. So we need other criteria to best read what it is!
Supply OR Demand.
This is what I look for.
(1) In the life of the move (Looking back 360 periods) Where does it fall.
At a current top?
At a current bottom?
At either and or a period of consolidation.
See the charts below.
Extreme Volume after a gap down during a down move
Close on High commentary relates to NEXT bar.
Notice the very LOW volume on the bar before the Next bar with an alert on it.
2 extreme volumes in an up move
Come back and read the next 3 bars after each Extreme Volume bar to help consolidate whats happening (explanation below).
Note the very low volume in the bar just after the last extreme volume bar.
No the software doesn't label EVERY extreme volume bar.
Fine but now how can I tell with some degree of confidence,what THAT volume in THAT place in its journey is Supply OR Demand--- how is it likely to affect future price action.
I am not interested in the open (Other than Gaps) But the high the low and the close.
Firstly the bar itself.
(1) Did it gap? If so in the direction expected or not?
Did that gap push price through resistance OR support?
Often large player push price above an area to lock sellers in or buyers out.
Its human nature to hold when in profit (or larger losses) or resist buying if price falls below
a well held level.
(2) During the period was range Wide Average or Narrow?
Narrow ranges tend to indicate capping at a level. Wide ranges will often tell a great deal about
sentiment within the bar and often the high or low will test an old area old support or resistance.
Reaction to that cannot be overlooked.A close ON resistance on high volume at the high of a bar
should be viewed with suspicion.Supply is often strongest here. Many will see this as an early opportunity
to trade in that direction.
(3) Where did it close.
Movement of the close toward the upper 25% or lower 25% of a bar indicate strength of the move in THAT BAR.
So the picture is coming together. But still little confidence.
For this we must now move to the next 1-3 bars.
It is believed by the EXPERTS in this type of analysis that a single bar of significance only holds influence
over the next 3 bars in the time frame it is being traded in. Seems pretty right from my observations.
Reading in conjunction with the following bars is in my view the most important stage in this form of analysis.
The next bars Volume/Range and Close will tell us a great deal about what the volume was (Supply or Demand)
in the bar in question.
(1) Confirmation of Demand (Further upside normally on reduced volume v the bar in questions volume,testing into the range of the previous bar).
(2) Confirmation of Supply ( Immediate down bar on volume, Very small range bar on high volume,test of the high confirming.)
Further upside on even more volume (Bias toward Supply and weakness)
Down side on very low volume (Bias toward Demand and strength)
Then to the next bar and the same 3 questions asked again.
At this point any testing of the high or low is to be observed closely,is it being supported or rejected. Small jumps above the high and then retreat to a lower close are REJECTION particularly on volume.
Any testing of lows which hold generally indicate some form of consolidation is occurring.
Within these patterns (Consolidation) we need to be looking at how well the lows are being supported and how strongly the highs are being rejected to gain an indication of distribution OR accumulation for future price movement.
Often doubling the time frame (Turning 2 bars into 1) can really clarify the answers to those 3 questions which of course are asked in that time frame. See chart(4)
This is the SAME CBA Chart but in a 2 day format I'm sure you can see things more clearly on this chart! Makes the daily easy to interpret---Pretty weak EH!
It takes a while (Many many charts) to advance to the next stage where we can read EVERY bar relative to its position. The best I have seen is Sebastian Manby.
Given this brief I though we could have a look at some in real time for comment and practice?
Can do some R/T on stocks and soon Futures! (I'm getting the R/T feed). Those that have it can perhaps if they wish post some of their own charts to practice on.
Hope this answers more questions than it creates.